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McGraw-Hill's
announcement last week that it would spin off its education-publishing business to shareholders by the end of 2012 was greeted favorably on Wall Street; the company's shares rose 17%, to 45.29.

With the gain, McGraw-Hill (ticker: MHP) looks fully priced. It now trades at a premium to its chief rival,
Moody'sMCO 1.7334556949117976%Moody's Corp.U.S.: NYSEUSD99.77
1.71.7334556949117976%
/Date(1481320925367-0600)/
Volume (Delayed 15m)
:
944363AFTER HOURSUSD99.77
%
Volume (Delayed 15m)
:
11991
P/E Ratio
21.548596112311014Market Cap
18750983642.3645
Dividend Yield
1.483411847248672% Rev. per Employee
339231More quote details and news »MCOinYour ValueYour ChangeShort position
(MCO), but the corporate split wasn't as extensive as some investors had urged and conservative management remains in place. The shares trade for almost 16 times projected 2011 profits of $2.90 a share, while Moody's, at 33, fetches 13 times the 2011 estimate of $2.50. Moody's offers a purer play on both companies' best business, their rating divisions.

Terry McGraw: Should he let a a fresher-eyed, lower-paid CEO take over?
Daniel Acker/Bloomberg News

Barron's has written twice on McGraw-Hill in the past five years. We urged McGraw-Hill to break up the company ("Free S&P!", Jan. 30, 2006) because there appeared to be no obvious benefits of keeping together the Standard & Poor's rating business, educational publishing, index licensing and media. McGraw-Hill then traded at a big discount to Moody's. We revisited McGraw-Hill with a bullish article two years ago ("A Valuable Franchise, Warts and All," Oct. 12, 2009), when the stock traded at 27 amid fears of legal liability stemming from its disastrous ratings of mortgage securities.

McGraw-Hill probably should have spun off or sold the publishing business in 2006 or 2007, when prices were higher and private equity would have been eager to buy it. That division may be worth $3 billion, a relatively small part of the $13 billion company.

The modest restructuring may reflect the conservatism of management, led by longtime CEO Harold "Terry" McGraw. Jana Partners also took aim at the company's corporate overhead, which it put at about $164 million annually. In 2006, we argued that the top brass weren't adding much value to the underlying businesses. The company acknowledged an expense problem by saying last week that it plans to examine $1 billion in total costs.

Terry McGraw's chief job should have been to protect S&P's reputation. He's well paid, earning over $9 million in total compensation last year. He plans to head the current company, less educational publishing, after the split. Maybe it's time for the 63-year-old McGraw to retire in favor of a lower-paid CEO who will take a fresh look at the company.

-- Andrew Bary

Perils of Perelman

Billionaire Ron Perelman's deal last week to buy out public holders of
M&F Worldwide
for $25 a share in cash probably undervalues the obscure conglomerate.

Our guess is that the deal will gain shareholder approval despite investors' reservations about the price, which some thought should be at least $30. M&F shares (ticker: MFW), which rallied by more than $4 last week, to $24.57, could drop into the teens if the offer is rejected.

M&F is a complex, debt-laden company whose main division, Harland Clarke, is a leading printer of checks; M&F also has a licorice unit. In June, Perelman proposed paying $24 a share for the 57% of M&F he doesn't own. He then raised his bid slightly and won approval from the company's independent directors.

Perelman: An investor says he's "living down to his reputation."
Robert Pitts/Landov

Barron's wrote favorably on M&F last winter ("Cheap Stock…With One Big Catch," Jan. 24), when it traded below 22, down from a peak of 67 in 2007. The buyout, which will cost Perelman about $275 million, looks like a coup for him because M&F made more than $2.50 a share in 2011's first half and over $6 in 2010. It's rare to see companies taken private for just four times trailing earnings.

"Perelman is trying to steal this company" for half of what it's worth, asserts Chris Mittleman, managing partner of Mittleman Brothers, a Long Island investment firm that holds the stock. "This is a classic example of Perelman living down to his reputation" of benefiting at the expense of other shareholders in companies he controls.

Perelman is taking some risk, because M&F has about $2 billion of net debt, more than four times annual pretax cash flow. However, nearly all the debt is held at subsidiaries. In the worst-case scenario—a bankruptcy of Harland Clarke—M&F would lose its equity in that subsidiary but still own a licorice business probably worth about $200 million, or $10 a share. Harland Clarke has been hurt by consumers' increased use of electronic payments. Its public 9½s bonds trade at 80 cents on the dollar, a 17% yield, indicating investor concerns about the company.

One M&F investor argues that because the stock and junk-bond markets have sold off since June, Perelman's offer looks better now than it did then. However, if he simply had used some of the company's ample cash flow to pay a dividend, the stock probably would be trading above his bid. (M&F pays no cash dividend.) Instead, he pursued education-related acquisitions that have yet to pay off.

One good bet: Dividends will flow to Perelman after M&F is private, letting him profit nicely. Again, the perils of investing alongside Ron Perelman are clear.

-- A.B.

Gundlach Loses Trial, But Wins the Day

Both sides claimed victory in the bitter trial pitting Trust Company of the West against its onetime star bond manager, Jeffrey Gundlach, who was summarily fired by TCW in December 2009.

Following a stormy seven-week trial in Los Angeles County Superior Court, the jury found Gundlach and three subordinates at his new money-management firm, DoubleLine, were liable for breaching fiduciary duty and stealing trade secrets. TCW General Counsel Michael Cahill said the verdict upheld "the principles at the heart of this case—integrity, honesty and trust."

But the real winner appears to be Gundlach, as we predicted in an Aug. 1 story ("Sex, Lies and Snazzy Investment Performance"). The jury awarded no damages to TCW for the breach of fiduciary duty and ordered the firm to pay Gundlach's side $66.7 million in back pay.

Thus a smiling Gundlach, garbed in an expensive, tailored suit with a neon-orange tie, told reporters he felt "great" as he exited the courtroom. Especially about the score, "67 to zero" as he put it.

Yet to be decided are the claims for Gundlach's misappropriation of trade secrets—account information, client lists, investment data and the like. The amount of the claim will be decided by presiding trial judge Carl West at a future time. But it seems unlikely that the judge will grant TCW much, if anything, given that the jury found no willfulness or malice was involved.

One by-product of the trial has been all the publicity Gundlach has received. Inflows into DoubleLine's mutual funds soared over the past seven weeks.